Best Biotech Stock Trades and Mergers to Watch in 2018

The biotech industry remains a good sector for investments as traders expect the number of mergers and acquisitions and FDA approvals to ramp up in 2018 since organic growth has been stymied

The iShares Nasdaq Biotechnology ETF (IBB) , which tracks an index composed of biotechnology and pharmaceutical equities listed on the Nasdaq, retreated from its October high amid the political discussions in Washington, D.C., but still ended 2017 with a more than 18% gain, which is in line with the general market, said K.C. Ma, director of the Roland George investments program at Stetson University in Deland, Fla.

The biotech stocks that are the most likely to rebound include several large cap, well-known ones which were affected in 2017. The following large-cap companies that look inexpensive include: Amgen (AMGN) , Biogen (BIIB) , Celgene (CELG) , Gilead Sciences (GILD) and United Therapeutics Corp. (UTHR) , Ma said. Amgen's CEO Robert Bradway has said it could increase its deal flow because it has $40 billion sitting in cash.

Late Stage Trials

Recent findings from late stage trials indicate that Novartis (NVS) , Roche (RHHBY) and Sage Therapeutics (SAGE) could be promising stocks in 2018, he said.

Roche's drug Atezolizumab treats non-small-cell lung cancer and the company recently announced the first study of a positive phase three combination trial that showed a cancer immunotherapy reduced the risk of the disease getting worse when used as an initial treatment in a broad group of people with advanced non-squamous NSCLC.

SAGE-217, a neurosteroid, treats major depressive disorder and Sage Therapeutics recently announced positive findings from a phase two study in major depressive disorders. These findings strongly support the fast-track designation the company received for SAGE-217 earlier this year.

Pot Stocks

California's end to the prohibition of recreational weed is likely to ramp up sales as more consumers shift away from making purchases on the black market. Others believe that because California has had a medicinal market for two decades, the impact might be smaller.

The surge of legal cannabis products could have an unintended consequence on stocks in the sector, he said. Several stocks such as GW Pharmaceuticals (GWPH) , Insys Therapeutics (INSY) and Kush Bottles (KSHB) dipped after states like California, Nevada and Florida passed medical and recreational measures last November, said Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor known as @WolfofWeedST on Twitter.

"They grow more weed than anywhere else," he said. "Investors who are clamoring toward potstocks might want to view this as a potential sell-the-news event after a week or so in January. Novice retail investors could see this as an opportunity to buy them on the dip. History always repeats itself."

While Insys Therapeutics has faced its share of massive problems in 2017 as its share fell below $5, their drugs are legitimate, Spatafora said. The company's intellectual property is more valuable than the company itself and Insys received fast track designation from the FDA in December for its cannabidiol (CBD) oral solution for the treatment of Prader-Willi syndrome, a rare genetic disorder characterized by insatiable appetite in children that often leads to obesity and type 2 diabetes.

John Kapoor, the company's founder, resigned from the company and its board of directors in 2017, after being arrested on charges that he allegedly bribed physicians to prescribe a fentanyl-based cancer pain drug.

Trade or Target

Insys could emerge as a takeout candidate and would be a good fit with AbbVie (ABBV) since it make some similar drugs, he said.

GW Pharmaceuticals was a volatile stock in 2017 and should be viewed as "more of a trade than an investment," Spatafora said. "They could get bought out unless the company develops more efficient drugs. At this price, I would be taking a profit."

GW Pharmaceuticals is an attractive biotech stock because early in December, Goldman Sachs upgraded the company to a buy and raised the price target to $174, said Michael Berger, founder of Technical420, a Miami-based company that conducts research on cannabis stocks.

"The company has several catalysts for growth and we continue to view GW as an acquisition target," he said. "GW has an attractive valuation, a deep pipeline of products that are in advanced stages of FDA testing and a significantly stronger balance sheet after a $225 million raise. We are bullish on the company's execution strategy and are favorable on its growth prospects."